Public Bill Committee

[Mr. Jim Hood in the Chair]

Clause 167

Overview

Question proposed, That the clause stand part of the Bill.

Ian Pearson: It is a pleasure to serve under your chairmanship for this part of the Bill, Mr. Hood. Clause 167 provides an overview of part 5, which enables the Bank of England to oversee certain systems for payments between financial institutions. It might be convenient for the Committee if I outlined what the clause does.
Payment systems are networks for the electronic transfer of money or credit between participating members, linking key financial firms to each other. A typical payment system comprises a scheme company or an incorporated association, members that are mainly, but not exclusively, financial institutions, rules established by the scheme operator covering such matters as settling claimspayment instructions, for examplebetween members, a system in which members input instructions to transfer payments and, in some cases, a separate, related or unrelated, company providing infrastructure, such as supporting IT systems.
The vast majority of economic transactions involve some form of electronic payment; for example, payment systems include those for the payment of financial contracts, such as derivatives; automated payments, such as direct debits; the system for clearing cheques; and systems used by the Government for benefit payments. In some cases, payment systems are embedded in clearing and settlement systems for transferring securities and other financial products. Payment systems are, therefore, vital to the functioning of financial services, markets and the wider economy.
The interlinkages between payment systems, banks and other financial intermediaries mean that any problems with payment systems have the potential to spread quickly through the financial system, ultimately affecting business and consumers. For example, problems in large wholesale systems have the potential to lead to liquidity difficulties for banks and to contagion in the markets. Problems in retail systems may result in much inconvenience and hardship for considerable numbers of peoplefor example, if benefit or salary payments cannot be credited to peoples accounts. As such, robust and effective systems for payments are essential to the proper functioning of the financial markets and the economy.
Currently, the Bank of England undertakes oversight of payment systems on a non-statutory basis, focusing on promoting the robustness and resilience of key UK payment systems. The Financial Services Authority has a statutory responsibility under the Financial Services and Markets Act 2000 for the regulation of recognised clearing houses that contain embedded payment systems. The Bank of Englands responsibilities and its operational role as a central bank naturally mean that it is involved in the design, management and operation of high-value inter-bank payment systems, which helps to ensure that those systems are operated in a prudent and effective manner. However, the lack of formal powers, including mechanisms for enforcement, limits the Bank of Englands ability to ensure that payment systems are robust and resilient. For example, the Bank of Englands ability to regulate the operation of systems is largely dependent on what can be achieved through dialogue with the management of payment systems and its assessment of systems compliance with international standards, published in the Bank of Englands annual payment systems oversight report.
The Government are therefore legislating to formalise the Bank of Englands role in the oversight of payment systems, to ensure that the Bank has the tools necessary to ensure that payment systems are operated in a manner that minimises risks to financial stability and disruptions to business and consumer interests. The provisions will provide, in addition to an important tool for the maintenance of financial stability, an important new statutory lever for the Bank of England to use in fulfilling its new statutory objective for financial stability, as provided for in part 7 of the Bill.

Peter Bone: The Minister did not explain whether there has at any time been a problem with the systems. Has current regulation ever failed? Has there ever been a problem with the system?

Ian Pearson: We consulted on whether there should be a statutory power for the Bank of England in those areas. The overall response from the consultation exercise was that it was a good idea, which is why we are proceeding with it in the Bill.
The clauses we are to debate follow a logical structure. I hope that hon. Members appreciate the recognition systems and the principles of regulation, and how they will be enforced, if necessary. Clause 167 provides an overview of what we are trying to achieve with bank payment systems by giving the Bank of England a statutory role. I commend the clause to the Committee.

David Gauke: It is a great pleasure to serve under your chairmanship, Mr. Hood. As this is my first contribution in the main part of the Committee stage, I declare an interest as a non-executive director of a deposit-taking institutionalthough for claritys sake I point out that it is not a payment system or a member of a payment system.
I am grateful to the Minister for setting out a brief introductory overview of the part of the Bill relating to inter-bank payment systems. He is right to highlight their importance. Figures produced by the Bank of England for 2003there may be more up-to-date figuresstate that the value passing through UK payment systems that year was £130 trillion, which is about 20 times the UK annual gross domestic product. That is the equivalent of almost 50 per cent. of GDP flowing through UK payment systems every business day. It is clearly an important system, consisting of high-value transfers between financial institutions but also more numerous, smaller transfers between individuals and/or companies. The Minister set out some of the circumstances, such as the payment and receipt of wages and salaries, Government benefits, direct debits and cheques and debit and credit card payments.
We recognise the potential for systemic risk. The Bank of England and the Government, too, have long recognised the potential for systemic risk from failure within the payment systems. If there is a problem with one there is likely to be a direct and rapid effect on other members. Even if there is no systemic risk, a failure in a payment system may cause considerable disruption to individuals. No politician would want to be responsible for the failure to pay wages and salaries on time.
We are broadly supportive of the provisions but it might be helpful for the Committee if I outlined some of the themes that we want to address during this part of the Bill. As the Minister says, the Bill is presented clearly and logically, which will be helpful to the Committee. We will raise specific questions as we go through each clause, but at this stage it might be helpful to highlight some of the key issues.
The first issue touches on the intervention made by my hon. Friend the Member for Wellingborough. What assessment have the Government made of the existing arrangements? As the Minister explained, the Bank of England has performed an oversight role on a non-statutory basis for some time. As the helpful Library note made clear:
It should be stressed that, to date, there has been no evidence that existing systems have failed or are threats to future stability.
Of course, that is not to say that we should not look to make improvements. I note the points about enforcement and so on. This may be one of those cases where the roof is being fixed while the sun is shining, to coin a phrase.

Mark Todd: A tired one.

David Gauke: Well, the sun is shining over this particular roof, even if not over most of the roofs nearby.
It would be helpful if we had a sense of how effective non-statutory regulation has beenfor example, in the dialogue between some payment systems and the Bank of England. The Bank has given examples of situations in which, through dialogue, it persuaded some payment systems to make particular changes. The settlement finality regulations are part of the existing regulatory regime, even though it is on a non-statutory basis, and we will discuss them with regard to our proposed amendments to clause 171. The regulations provide payment systems with some protection from insolvency law, which could disrupt them, but we will discuss those issues later this morning.
The second broad theme is the objective of the oversight. The Bank of Englands payment systems oversight report for 2004 states:
The main objective of the Banks payment systems oversight is to assess and, if necessary, seek to ensure mitigation of risks to the wider economysystemic risk.
I suspect that the Minister will say that one difference is that the Bank states that it will seek to ensure mitigationalthough of course it could take a stronger line as a consequence of the provisions. However, is the focus on addressing systemic risk? What is the purpose of the regulations?
The Bank of Englands 2004 report further states that
efficiency considerations also need to be weighed,
which leads me to a further themethere can be conflict between safety and efficiency. The Bank put it very well:
The Bank also recognises that designing and operating a payment system to minimise systemic risk would be counterproductive if the system thereby became so expensive or impractical to use that payment traffic migrated to less safe alternatives.
The Minister will be aware of that danger. We will be seeking reassurance in the debate that the operation of the measures will not result in a less safe system because banks go elsewhere.
It is notable that the Bank of England has previously expressed, perhaps rather modestly, the limits of its oversight, noting that
the Bank as overseer, cannot guarantee that there will never be operational failures of payment systems.
Does the Minister accept that the point applies equally to the new arrangementsit is not about a guarantee, but about doing everything that we can to eliminate riskor would he go further and say that payment systems will now be 100 per cent. safe?
On the balance between safety and efficiency, concerns have been raised that some of the enforcement provisions, which we will come to later this morning, may be so draconian as to dissuade businesses or individuals from being involved in payment systems. Are the costs for payment systems likely to increase substantially? I want to stress that by raising these questions we are not arguing against the provisions, but we think that these are legitimate questions to put to the Government.
The next theme is the scope of the recognition regime. It focuses on payment systems, but I hope that this morning it will become clearer whether the clause will apply to all payment systems or only to the largest. Will there be a differential application of the principles and codes of practice, depending on the nature of the system? Until now the Bank of England has adopted different approaches depending on the type, number and value of payments made, the design of the system, and the potential substitute means of making payments. It is notable that it has particularly focused on CHAPS and CREST, then at the next level BACS, CLS and LCH.Clearnet Ltd, followed by the Cheque and Credit Clearing Company and LINK and finally debit and credit card systems. Will there still be that differential approach and that flexibility? We will probably debate those matters when we look at the principles and code of practice.
What the provision does not do is focus on payment system members, so it is worth highlighting the role played by some major banks, which settle payments for a large number of other banks. Not all banks are members of payment systems and relatively few of them are settlement banks. As the Bank of England has said, in some respects the largest of the settlement member banks have the characteristics of payment systems.
In some other jurisdictions there is close supervision of payment members; for example, system participants are obliged to provide information to central banks. In the UK, the payment system is required to do that, but in jurisdictions such as the US, Australia, Austria, Hong Kong and Singapore the obligation to provide information applies to participants. Central banks can also set membership conditions in Australia, France, Hong Kong, Norway and Singapore. Will the Minister say a little about that?
Another area of potential risk relates to the infrastructure providers. It is interesting that the Bank of England has highlighted the dependence of all the network participants on a single supplier as the second potential source of riskthe first being the systemic risk of a problem in one payment system migrating to another. In particular, SWIFT, which provides messaging services in support of CHAPS, is used heavily in those circumstances. How will the provisions help us to address that potential risk? I think the Minister will be able to answer that question.
The next themefamiliar to our debates on the Billis how the tripartite arrangements will work in this area. Banks, principally regulated by the FSA, are payment system members and play an important role in those systems. The likes of CREST and LCH.Clearnetrecognised clearing houses and investment exchangesare principally regulated by the FSA rather than the Bank of England. How will the Bank work and co-operate with the FSA? The Treasury will make the recognition orderswe will come to that issuebut how will the relationship between those three entities work? The question that we keep coming back to is, Who is in charge? The greater the clarity about that, the better.
The next related theme is the general role of the Bank of England. The Bank has a role as an operator of real-time gross settlement systemsat the heart of the CHAPS systemyet it is also the regulatory body that will presumably supervise CHAPS. How do we avoid a conflict of interest? We support the Bank of Englands performing that role. There are good historical reasons why it should, and the role is central to financial stability. Perhaps in dealing with those points, the Minister will explain why the Government continued to allow the Bank of England to play such a major role in the oversight of payment systems, at a time when, generally, everything was handed over to the FSA.
The final theme touches on the international perspective. It is all very well looking at payments within the UK, but we all know that there will be a huge number of cross-border payments. In those circumstances, how would the provisions that we are debating this morning play a role, and how are the Government working with other central banks and financial institutions to ensure that there is no systemic risk from a breakdown in cross-border payment systems? We must not forget that aspect.
I hope I have been helpful to the Committee in outlining some broad concerns before we turn to each of the provisions in detail. I do not necessarily expect the Minister to respond to each and every one of those concerns now, but I hope they provide a useful summary of some of the points that we hope to raise over the course of the morning. I reiterate that we are supportive of the provisions but, as always, it is appropriate that they have proper scrutiny, and that those who are studying the debate have a better understanding of the intention and practicality of some of the measures that we are debating.

Brooks Newmark: Like my hon. Friend the Member for South-West Hertfordshire, I shall put down a few markers on some issues that have come to lightnot simply from listening to the Minister, but from reading the explanatory notes and listening to my hon. Friend.
Clause 167 imposes a statutory regime on inter-bank bank systems when currently the Bank of England, as I understand it, oversees payment systems on a non-statutory basis. The Governments position seems to be formalising the Bank of Englands role in creating stability, which has to be a good thing. We have seen the huge systemic risk out there, following the current crisis. The build-up we have before us addresses many of the issues which have been raised, and highlighted, by the current crisis, but it has also sought to address issues that have been raised over a long time. It is therefore a good thing, as is the ability of the Bank of England and the Government to make a quick response to problems in the banking systems.
The Bill will enable the Bank of England to retain power of informal oversight when it considers it appropriate. It is that sort of language that I am trying better to understand: what is informal oversight and what does appropriate mean? I appreciate that is not the language used in the explanatory notes or the Bill, but it is the language I have heard people use when addressing the clause.
Our partys position is clearly that formal regulation is a positive thing, particularly when payment systems have a systemic risk. Recent years have seen an explosion in the values and volume passing through them, particularly in derivatives, which many people do not understand. I draw the attention of Members to my register of interest; I have had 20 years significant experience in the banking system. One of the problems is lack of understanding, particularly of derivatives, which have caused some of the major problems relating to systemic risk and, as we have seen, the fall-out from that.
The Minister made a couple of points, using the words robust and resilience, about the system that we are creating. Has he thought about how to stress-test the system to see how robust and resilient it is? He referred to oversight and tools, but I am curious to know which tools he is talking about and what he meant by that term. How will the tools cause minimum disruptionsanother phrase he used? Which groups did the Minister consult when coming up with the proposal and what feedback did he receive? It is important that we understand which issues were raised and how the clause will deal with them.
My hon. Friend the Member for South-West Hertfordshire talked about the tripartite relationship between the FSA, the Treasury and the Bank of England. That tripartite system broke down over Northern Rock. It seemed as though everyone was pointing the finger at everyone else, with no one taking responsibility. How will the provision fix that situation?
Finally, my hon. Friend referred to the important issue of cross-border relationships. Given that the financial system is global, how do we hope to enforce our legislation on foreign entities over which we do not have as much control as we would like? We can try to fix things in the UK, but how will that deal with systemic breakdowns in other countries?

Stewart Hosie: It is a pleasure to serve under your chairmanship, Mr. Hood.
I want to pick up on the relationship with the tripartite system to which the hon. Member for South-West Hertfordshire referred. The clause describes how part 5 of the Bill enables the Bank of England to oversee certain systems. Later clauses cover interpretation and regulation, but I shall touch on them now because it is important to understand where confusion might arise.
Clause 170 allows the Treasury to impose recognition orders. Clause 172 requires it to consult the Bank of England and the FSA and the orders can, of course, be revoked. Clause 174 covers the regulation principles. The Bank of England publishes them, but it is required to consult the Treasury. Clause 175 allows the Bank of England to deal with the code of practice, which many people might consider more important than the principles because it is the mechanics of the processthe nuts and boltsbut nothing in the Bill says that the Bank needs to consult the Treasury at that point. Under clause 176, the Bank of Englandnot the Treasurymay require an operator to establish rules and, under clause 177, the Bank of England can give direction. Clause 178 says that the Bank of England must have regard to the action taken by the FSA.
The interpretation and the regulations of the Bill set out a mix or a balance between the action that the Treasury takes and that taken by the Bank of England, sometimes in consultation with the Treasury and/or the FSA, and sometimes not. I am trying to get to the bottom of the Governments thinking behind why various bits of responsibility have been allocated to the Treasury or the Bank and why consultation is required on certain elements, but not others. I accept that those points touch on subsequent clauses, but I should be grateful if the Minister would explain why the breakdown in responsibility and the particular roles have been allocated in such a way.

Peter Bone: It is a pleasure to serve under your chairmanship, Mr. Hood.
I start with a slightly different view of clause 167 even from that of Members of my Front Bench.

David Gauke: Surely not.

Mark Hoban: Not again.

Peter Bone: I am unhappy to see regulations brought in, unless it can be proved that they should be brought in. The Government probably take the other view: regulations should be brought in, unless there is an overwhelming case that they should not be introduced. That is a difference between us from the start. I refer to Yes Minister, because it is the best example of how the Government work. If there was a failing in the banking system, the Governor of the Bank of England would ask his chairman and chief executive out to lunch and the problem would be sorted out. From the Ministers introduction to the clause, it seems that the system has been working rather well and that there has never been any sign of a problem in the oversight of the payment system. It worries me that we may be regulating because of the present circumstancesbecause we think that we should be doing somethingbut actually it will make no difference whatever to the process or the security of the system. I hope that the Government will persuade me otherwise as we go through the clauses in detail, but that is my concern in principle.
My concern has some backing to it. Her Majestys Treasury produced a helpful impact assessment in October 2008, which states:
The Authorities do not envisage that this provision will amount to a substantial change in practice.
If there is no change in practice, why are we bothering to introduce regulations to make something happen? If it is already happening, there seems little point in bringing it in. It concerns me that the regulations do not have effect across the board, but are restricted to systematic or system-wide consequences. How is it determined in advance whether a bank or clearing house falls within those concerns? At this stage, I am not sure that I am totally in favour of the clause.

Ian Pearson: I hope that I can persuade hon. Gentlemen of the importance of the clause. The debate has usefully set out the general principles that will be discussed under later clauses.
I will explain the background to this proposal. Since early last year, the authorities have been developing a clearer and more robust framework for the oversight of payment systems. That was part of the Governments wider work to strengthen the framework for financial stability. I emphasise that these measures are not the result of problems in the payment system. However, we must take it into account that the characteristics and importance of payment systems could change, or that wholly new payment systems could develop and take on systemic importance. Given the importance of payment systems to the financial system, and therefore to wider financial stability and consumer protection, it is sensible to pass these measures as part of a package of proposals in the Bill.
I welcome the hon. Member for South-West Hertfordshire to his debut in the Committee. He asked about the scope of the measure and which systems would be covered. The consultation document identified CHAPS, Europea, LCH.Clearnet, BACS, Cheque and Credit Clearing, the faster payments service and the LINK scheme as areas that would be regarded as key wholesale inter-bank systems under the authoritys preliminary assessment. It is important to recognise that such systems process about £1.5 billion daily. That emphasises their systemic importance to our financial system and the UK economy.
I will make a few points on the remarks of the hon. Member for Dundee, East and others who talked about the architecture of the system. He was not making a debating point, but was genuinely interested in knowing how the architecture fits together. I will explain the general principles and we will cover the detail when discussing subsequent clauses, as the hon. Member for South-West Hertfordshire said.
The general principle is that in the first instance it is the responsibility of the Treasury, following consultation with the Bank of England and the FSA, to designate a payment system and make a recognition order under clause 170. It is the responsibility of the Bank of England to exercise oversight of the payment systems. That is clear in the Bill. As I explained earlier, that will put the Bank of Englands current responsibilities on a statutory footing, which we believe is the right and prudent thing to do. We want the Bank of England to consult as appropriate with the FSA, particularly where payment systems are embedded in recognised clearing houses or investment exchanges, which are also subjected to the FSAs regulatory regime. That is why there will be a memorandum of understanding between the Bank and the FSA to ensure that there is no duplication and there is efficient regulation.
It is also important to stress that in all these instances the tripartite authorities will work closely together. There are clearly distinct roles for the Treasury, the Bank and the FSA in this, but we would expect close co-operation on a regular basis between the three organisations that make up the tripartite system.

Peter Bone: Will the Minister give way?

Mark Hoban: Will the Minister give way?

Ian Pearson: Before I give way to the hon. Member for Wellingborough I should tell him that the days are gone when the Bank of England gets a bank in and has a cosy chat. It is important that the tripartite authorities work closely together and have good relationships with the banks. There is a wider recognition that putting these arrangements on a statutory basis is the right way forward.

Peter Bone: That is most helpful. We used the example of people getting around a lunch table and discussing matters. We are now trying to formalise this in some sort of memorandum of who does what and when. Is this Committee likely to be able to see a draft of that memorandum?

Ian Pearson: The Committee can see what is in the Bill. It sets out clear and distinct roles. The issue of a memorandum where the FSA regulates and the Bank of England regulates at the moment is pretty much a technical issue, which we would not expect to see in the Bill. I give way to the hon. Member for Fareham, who obviously cannot stay away from the Committee.

Mark Hoban: I am drawn to it by the magnetism of the subject we have been discussing. The Minister talked about arrangements for the FSA to look at regulated investment exchanges and clearing houses, but a volume of transactions does not go through them, such as derivatives that are not traded through exchanges. How will he ensure that the payment systems that relate to them are covered by the Bill because they are an important volume of transactions in the wholesale market which, if we are looking at maintaining financial stability, ought to be covered in some way by these rules?

Ian Pearson: There are powers in the Bill that allow the Treasury, in consultation and having received advice from the Bank of England and the FSA, to recognise key wholesale inter-bank payment systems. I have given an indication of which payment systems of preliminary assessment would suggest that we would want them to be recognised. But we need to ensure that we have adequate coverage so that the Bank can discharge its responsibilities for financial stability appropriately.

Stewart Hosie: I presume that the Minister is talking about clause 170 where the Treasury makes the recognition order. I thank him for his previous explanation: the Treasury makes the recognition of the systems and the Bank then does the other bits. That is perfectly reasonable. The question posed by the hon. Member for Fareham is very important, given that London is one of the three key wholesale financial markets in the world. The Minister has just said that there is provision for the Treasury, through regulation or by order, to specify other systems that might come into this. Will he provide a little more detail? Does he have anything in mind? How would he go about putting a recognition order in place for one of those large wholesale systems that is not at the moment an official, recognised inter-bank system? How would that happen and what criteria would be used to do that?

Ian Pearson: We are talking about the general principles in this clause. We shall get on to those questions when we debate the relevant clauses. The hon. Gentleman also asked about who was consulted and what issues were raised. Consultees included the Bank of England, payment system operators, users of payment systems and the payments council, which is the representative body for payment systems. Everybody wanted to see clarity and responsibility in the system and we believe that the Bill achieves that. Overall, there was widespread support for the legislative proposals and we can proceed with confidence. The financial community broadly welcomes the thrust of what we are trying to do in part 5 of the Bill. No doubt, we will want to tease out some of the detail during this and other sittings.

Question put and agreed to.

Clause 167 ordered to stand part of the Bill.

Clause 168

Interpretation: inter-bank payment system

David Gauke: I have two questions for the Minister. This is an interpretation clause and should not detain us for long. The clause relates to an inter-bank system. Subsection (1) refers to
arrangements designed to facilitate or control the transfer of money between financial institutions who participate in the arrangements.
I should be grateful if the Minister said a little more about money. We know that money includes credit, but the Bank of England publication, Oversight of Payment Systems from November 2000, states that
money is regarded as cash (ie notes and coins issued by the central bank or government) and claims against credit institutions in the form of deposits.
It continues:
In the end, however, what is acceptable as money is a matter of behaviour and the boundary could move.
Does the Minister agree that money is a more flexible concept than it might first appear?
My second point is about subsection (5):
A system is an inter-bank payment system for the purposes of this Part whether or not it operates wholly or partly in relation to persons or places outside the United Kingdom.
That comes back to the territorial point that has been mentioned already. In order to fall within the regime, is it necessary for the operation of the payment system to be in the UK? Does it matter where the participants are? Is that the test? If so, this is a broad territorial test, and it could appear to cover any payment system anywhere in the world. I assume that the key point is the operationwhere is that performed? If it is performed from the UK, will it be caught by the system so that it does not matter where participants are based?

Peter Bone: On my hon. Friends last point, if I send money to America and there is a transfer between a British bank and its subsidiary in the US, is that part of the system? If the payment originates in the US and money is sent to me, will the regulations cover the bank over there? That is an important point.

Brooks Newmark: I, too, shall be brief. I am sorry to see that the hon. Member for Wolverhampton, South-West (Rob Marris) is not on the Committee. I know how assiduous he is with explanatory notes. Having learned my lessons from him, I will ask a couple of questions relating to points made in the explanatory notes. The first is about subsection (2), which states that if non-financial institutions participate, that will not prevent the process from being considered an inter-bank payment system. I am curious about what institutions the Minister has in mind when he talks about non-financial institutions. Why has that been raised, what red flags have given him concern about non-financial institutions and why are they being brought under the umbrella? I suspect I know why, but I am curious to hear his take on the matter.
My second question relates to subsection (5), but it approaches from a different angle to that taken by my hon. Friend the Member for South-West Hertfordshire. It relates to the issue of systems operating wholly or mainly outside the UK that are to be included and how we will deal with different regulatory environments. A provision might be interpreted as being right in the UK because it has an impact on what goes on in the UK, but how do we try to enforce policies with institutions under different regulatory regimes in other countries?

Ian Pearson: I am happy to try to provide clarification for the hon. Gentleman. As the hon. Member for South-West Hertfordshire said, the clause defines the use of the term inter-bank payment system throughout part 5. He referred specifically to subsection (1), which defines the term inter-bank payment system for the purposes of the Bill and refers to the arrangements that enable the transfer of money. Subsection (4) confirms that that includes credit between participating financial institutions, which are defined in subsection (3) as banks and building societies. Let me be clear that the Bill will give us the flexibility to recognise new systems in the future, and we think it appropriate that we should be able to do so. Let me also be clear that that does not include internal bank systems or correspondent banking arrangements.
The hon. Gentleman also raised the issue of subsection (5), which will ensure that systems operating wholly or mainly in relation to persons or places outside the UK can be classed as inter-bank payment systems for the purposes of part 5. I shall give a little more detail on that because a few hon. Members questioned how the legislation would work. Recognised inter-bank payment systems that are wholly or partly based outside the UK might be systemically important for the UK financial system. Where that is the case, part 5 provides for the Treasury to recognise them and for the Bank of England to oversee them to the extent that that is possible. In most circumstances, that oversight would be delivered through the Bank of Englands participation in international co-operative agreements with other central banks, because that is the nature of things.
Clearly, we cannot regulate for the American banking system, as the hon. Member for Wellingborough hinted, but we can ensure that the Bank of England can participate in those international co-operative agreements and make the points that it needs to in order to discharge its responsibilities.

David Gauke: I am grateful to the Minister, because what he has just said is helpful. For further clarity, is he saying that the Treasury will not seek a recognition order in respect of a payment system that is regulated by another central bank? Is he saying that it will not go that far, but that the Bank of England will undertake a role in oversight? I am not quite clear about that. I note his point about not wanting to regulate things that are regulated by another central bank, but is he saying that there will not be a recognition order for such a payment system?

Ian Pearson: I am clearly saying the latter. We think that in most circumstances it will be appropriate that oversight is delivered through the Bank of Englands participation in international co-operative arrangements. It is not right to say that that will be the case in each and every circumstance, because I cannot anticipate what future circumstances might be. However, the normal way of things is that we would discuss such matters with other central banks as part of the normal arrangements. I hope that answer provides clarity to the Committee.

Question put and agreed to.

Clause 168 ordered to stand part of the Bill.

Clause 169

Interpretation: other expressions

Question proposed, That the clause stand part of the Bill.

David Gauke: My intervention on this clause will be even more brief and concerns the terminology used of the operator and manager of a system. Before I entered this place, I was a solicitor specialising in regulatory matters. Unfortunately, I did not specialise in this area but in collective investment schemes. Over the years I worked in that field, I was never entirely comfortable that I understood the difference between operating and managing a collective investment scheme. The clause uses the terminology of operating and managing a payment system. Perhaps the Minister will enlighten the Committee on the difference between the two. As far as I can see, both are swept up under the definition of operator for these purposes.

Ian Pearson: The clause defines various terms used throughout part 5, as the hon. Gentleman indicated. In particular, subsection (a) defines the term operator of an inter-bank payment system to which the provisions of this part apply if the inter-bank system is recognised by the Treasury under clause 170. It is a sensible and straightforward provision. Subsection (b) allows that
a reference to the operation of a system includes a reference to its management.
Subsection (c) defines references to the UK financial system in the same terms as section 3(2) of FSMA, which states:
The financial system means the financial system operating in the United Kingdom and includes
(a) financial markets and exchanges;
(b) regulated activities; and
(c) other activities connected with financial markets and exchanges.
I do not think that I need go into detail on subsections (d) or (e).
The clause makes it clear how we interpret the terms used. It is pretty straightforward and is understood by the financial community that considers these things closely.

Question put and agreed to.

Clause 169 ordered to stand part of the Bill.

Clause 170

Recognition order

Question proposed, That the clause stand part of the Bill.

David Gauke: I will leave the issue of which payment systems will be recognised until we discuss clause 171. However, I have one or two questions on clause 170.
First, as the hon. Member for Dundee, East said, the recognition order is made by the Treasury. Presumably, because it is an order it must be made by the Treasury and cannot be made by the Bank of England. Will the Minister explain what the role of the Bank of England will be in determining whether a recognition order is appropriate? This issue relates to the discussions we have had on the relationship between the parties to the tripartite arrangement.
Subsection (2) states:
A recognition order must specify in as much detail as is reasonably practicable the arrangements which constitute the inter-bank payment system.
The terminology
in as much detail as is reasonably practicable
is somewhat vague. It may be the best that can be done in the circumstances. Does the Minister anticipate difficulties in specifying what is covered? I do not think that there will be, but I should be grateful for his thoughts.
Subsection (3) makes the interesting point:
The Treasury may not specify an inter-bank system operated solely by the Bank of England.
Following the example of my hon. Friend the Member for Braintree, I too have looked at the explanatory notes on the clause. Paragraph 381 is interesting:
The Bank of England has a central role in relation to certain payment systems. In particular, it operates the Real Time Gross Settlement System and it acts as an infrastructure provider in relation to CHAPS.
I am sure that subsection (3) is not preventing the Treasury from specifying a system that is partly operated by the Bank of England, because that would cover some of the main payment systems being addressed. The terminology clearly refers to inter-bank systems operated solely by the Bank of England, while the explanatory notes say that
the Bank of England could step in and provide payment system services.
In the light of recent events, we consider that less unlikely than in the pastthe Government or a Government agency performing such a major role in this area.

Brooks Newmark: My hon. Friend is titillating me, because he is skirting around the key phrase in paragraph 381. I would underline the part about the possibility of the Bank of England in some circumstances stepping in. I am curious about that central question, which I ask through my hon. Friend. What does the Minister think such circumstances might be? What advice does he have? What situations is he thinking about?

David Gauke: I am grateful to my hon. Friend, although I do not know whether I should apologise for titillating him or not. I was going to come to that very point.
It is noticeable that, in some jurisdictions, the performance of a payment system is performed by a central bank, essentially, rather than by private entities that are regulated. It might be helpful to the Committee if the Minister indicated whether the Government considered nationalising payment systems. For the avoidance of doubt, he could explain why he thinks that nationalisation is a bad idea. We are with the Government in viewing a regulatory system, rather than nationalisation, as appropriate, but perhaps the Minister would elaborate.

Brooks Newmark: It was not the issue of nationalisation that crossed my mind. However, the explanatory notes say that
in some circumstances, the Bank of England could step in.
I assume that the Minister does not think that could step in means nationalisation; it just means to enforce some regulation, which we are trying to impose through the Bill. Or am I incorrect, and my hon. Friend correctthat it is nationalisation or nothing?

David Gauke: Again I am grateful to my hon. Friend. My reading was that, if the Government provide the payment system services, they are essentially performing that role, which is what happens in some jurisdictions. The Government are maintaining that option, although not on the face of the Bill. They do not need to do so in the Bill, but the explanatory note hints at the possibility of circumstances in which the Government would step in, such would be the systemic risk at that time. I am not saying that that would necessarily be the wrong thing to do, but elaboration from the Minister would be helpful to the Committee.
If my hon. Friend does not wish to intervene, I shall go back to the point about the real-time gross settlement system, and to what extent that can be seen as separate from the overall CHAPS. For example, is there a contributory element? If so, it would be regulated by the Bank of England, and we would have circumstances in which an element of CHAPS is both operated and regulated by the Bank of England. That is my understanding, and I do not think that subsection (3) changes that. I should be grateful for the Ministers confirmation.
Subject to that, I have more points to raise with regard to the scope of the recognition system, but it would be appropriate to address that under clause 171.

Brooks Newmark: I shall be brief. I am still not clear, notwithstanding the excellent points raised by my hon. Friend the Member for South-West Hertfordshire.
The explanatory notes say in paragraph 381 that in some circumstances the Bank of England could step in and provide payment system services. Is that a nationalisation of the payment system, as my hon. Friend is saying, or is it the Bank of England acting as a facilitator for a short time? What period of time are the Government thinking about? Is it two days, a week or a month, or is it a nationalisation that will be there for a year or five years? I can see what the circumstances are but it is the timeline that concerns me because that makes a difference between the Bank of England being a facilitator for a short-term systemic breakdown and a full-blown nationalisation of the payments system.

Ian Pearson: The clause gives the Treasury power to designate by a recognition order an inter-bank payment system as a recognised system, which is subject to the Bank of Englands powers of formal oversight conferred under part 5 of the Bill.
Before addressing the points raised by the hon. Members for South-West Hertfordshire and for Braintree, particularly with regard to subsections (2) and (3), I should like to return to the original point about why the Treasury is being given the power to designate in these circumstances. In essence, the Government believe that the Treasury is best placed to make this assessment. As the UKs finance and economic ministry, it has wider powers than the Bank of England. The Government have responsibility for delivering conditions for business success in the UK by supporting fair, stable and efficient financial markets. The Treasury and the Chancellor of the Exchequer also remain responsible for ensuring compliance with the UKs international obligations. The Government have these wider responsibilities but we think it right to work closely with the Bank of England which will take clear responsibility in terms of its involvement in financial stability, with the other party to the tripartite arrangement, the FSA. We remain convinced that the Treasury should have overall responsibility in the area of recognition orders.
The hon. Member for South-West Hertfordshire raised a number of points about subsection (2) which says that the recognition order must contain sufficient description of the arrangements that constitute the inter-bank system so that it is clear to operators, customers, members, third parties and the Bank of England what has led to the systems recognition and, importantly, in order to identify the arrangements over which the obligations conferred under part 5 of the Bill apply. We have no indications of any problems with this but it is clearly something required to ensure that part 5 of the Bill can operate effectively.
Hon. Members also raised the issue in subsection (3):
The Treasury may not specify an inter-bank system operated solely by the Bank of England.
This provision ensures that the Bill does not unintentionally capture internal systems used by the Bank of England to conduct operations in its role as a monetary authority. The Bank of England provides facilities that allow transactions in inter-bank systems to be settled across its balance sheet. It is not an operator of payment systems within the meaning of the Bill. I hope that makes the situation clear. If the Bank were to become the operator of an inter-bank payment system in the futurea speculation raised by the hon. Member for Braintree but which we think would be wholly exceptionalits operations in that field would be bound by its overall statutory responsibilities in respect of maintaining financial stability. It would apply the same criteria to its own operations as it would expect of others. The risk that the operator takes insufficient account of overall financial stability considerations, which could arise in privately operated inter-bank payment systems, would not arise in this case if a payment system was operated by the Bank of England. That makes the situation clear. I hope that I have been able to answer the questions raised by hon. Members in this area.

Question put and agreed to.

Clause 170 ordered to stand part of the Bill.

Clause 171

Recognition criteria

David Gauke: I beg to move amendment No. 46, in clause 171, page 88, line 18, at end add
(3) The Treasury may make a recognition order in respect of an inter-bank payment system only if the system is eligible for designation under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999..

Jimmy Hood: With this it will be convenient to discuss amendment
No. 47, in clause 171, page 88, line 18, at end add
(3) The Treasury may make a recognition order in respect of an inter-bank payment system only if the system has been designated under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999..

David Gauke: These are probing amendments. They are intended to flush out some of the issues that relate to the relationship between the regime in these provisions and the regime that already exists for some payment systems, under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999the settlement finality regulations, as they are known to their friends. They provide a comprehensive legislative framework for the purpose of protecting systemically important payment systems.
The purpose of the settlement finality directive and regulationsthese regulations are based on an EU directiveis to reduce risks associated with participation in payment settlement systems by minimising the disruption caused by insolvency proceedings brought against a participant in such a system. The main provisions of the directive ensure that bilateral and multilateral netting are protected from potentially disruptive provisions of insolvency law and that payment orders are protected from insolvency law provisions from the moment they are entered into a designated system. There is a prohibition of insolvency laws having retroactive effect.
As far as I can seeI suspect the Minister will correct me if I am wrongunder the settlement finality regulations the following payment systems have been designated: CHAPS sterling and CHAPS euro, CLS, CREST and LCH.Clearnet. They are regulated by the FSA because they are recognised investment exchanges or clearing houses. The purpose of the regulations is to grant some certainty to these payment systems and their participants that insolvency law will not intervene and unravel a whole set of transactions.
In distinction to what we have here, the designated systems system is an opt-in system. Systems can choose to be designated and benefit from this protection. Here the Bill is structured so that the Treasury determines whether a system should be recognised. Such recognition does not provide particularly great benefits, other than providing external confidence. It imposes a number of obligations on the systems. The point that I am seeking to examine with these amendments is whether it is right to distinguish between the systemically important designated system and a new recognised system, whether that will overcomplicate the matter and whether there is anything we can do to roll the two together.

John Pugh: The hon. Gentleman has just mentioned distinction. Liberal Democrat Members are having difficulty in distinguishing between amendments Nos. 46 and 47 as written in the amendment paper. Are they written correctly? They appear to be word for word identical, and it is a bit hard to understand why two amendments are needed to do the job of one.

David Gauke: I am grateful to the hon. Gentleman. I had seen an earlier version of the amendment paper. Two separate amendments had been tabled and both appear to be in the final printed version. The hon. Gentleman is absolutely right, which is a great pity. At least let me discuss what I was intending to do.

Mark Todd: Which one are you going to speak to?

David Gauke: It is difficult to argue for amendment No. 46 over No. 47they both have their merits.

Ian Pearson: And the same flaws.

David Gauke: As the Minister saysthey both have their flaws. I shall move on to the purpose of the amendments tabled, albeit not put on the amendment paper correctly. Amendment No. 46 essentially says that one may only make an order if the system is eligible under the settlement finality regulations.
Actually, there is a subtle difference between the amendments. The amendment paper is correct and I apologise for suggesting that it was not. If the hon. Member for Southport looks carefully, he will see that the distinction is that amendment No. 47 states that a system may only be recognised if it has been designated as opposed to is eligible for designation. I apologise for being slow and for suggesting that an error had been made.
To be fair, technically, amendment No. 46 has its weaknesses. The schedule to the settlement finality regulations sets out requirements that must be satisfied for a system to be designated. It might be better if amendment No. 46 referred to that schedule rather than simply saying is eligible. We are seeking to explore whether the designated regime in the settlement finality regulations is likely to cover the types of entity that could be at systemic risk and whether those entities will benefit from the insolvency protection law. We could give systems greater control over whether they fell under the recognition regime. There is no particular voluntary system, but those entities that are going to be systemically important are likely to fall within the settlement finality regulations already.
I can move on, if you would like, Mr. Hood, to raise other points on clause 171, but I am happy to leave it there, having raised the issues of whether the two systems could be run together and of whether it would cause unnecessary uncertainty, contradiction or complication to have both recognised and designated systems. Whether through these subtly different amendments or other methods, the Government should find a way of simplifying what may be an unnecessarily complex system.

Peter Bone: The amendment draws out an important issue and touches on what I said at the beginning about a general principlehow do we define a system that will have systemic failures? How do we know which systems are brought in? We are talking about a system that already has some designations. Looking at the clause, I wonder whether it would have been better if the Government had stopped at clause 171(1), which gives them the insight to be able to make the decision on their own. To have subsection (2)(a), (b), (c), (d) and (e) is window-dressing, in a way, because it is the first part that counts. I understand that the Government are trying to be helpful, but in reality, if they thought that there was a problem, they would not worry about the rest of it; they would just go ahead and do it. I am therefore not sure that we need subsection (2).

Brooks Newmark: I want to follow on from the point that my hon. Friend has raised. My point also concerns subsection (1), but I take a different view on it. Clause 171 states that the Treasury may make a recognition order only if disruption to operation of the system, or deficiencies in its design, would
threaten the stability of, or confidence in, the UK financial system.
I am sure that the Minister will not wait until there is a disruption and that he will be looking for certain red flags in the system which will trigger disruption out there. I am therefore curious as to how he and his advisers will go about trying to recognise a systemic breakdown before it happens. What red flags, which may cause systemic breakdown further down the road, has he been advised may be out there?

Ian Pearson: It would be our intention first to identify systemically important inter-bank systems and for those to be designated. That is not because we think that there is imminent risk of catastrophic failure of those systems, because we do not. However, we think that it is right to identify systems that have critical importance, and the recognition criteria in clause 171(1) and (2) are both important in this respect.
I refer specifically to the amendments. I appreciate that the hon. Member for South-West Hertfordshire says that they are probing amendments. He also says that they may have been inspired by some of the responses to the consultation, where two of the responses suggested that there could be a potential in the recognition criteria to duplicate criteria by which a system can be designated under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999the SFRs.
The amendments seek to ensure that only inter-bank payment systems eligible for designation, or those that have been designated under those SFR regulations, may be recognised by the Treasury. That limits the scope of the Treasurys power under clause 171, which sets out recognition criteria. I shall explain why I think that is a bad idea.
First, amendment No. 47, as proposed, would mean that a payment system not designated under the SFRs could not be recognised by the Treasury by order made under this clause, notwithstanding its systemic or system-wide importance. That is particularly significant as there is no obligation for payment systems to apply for designation under the SFRs. The amendment would simply undermine the robustness of the framework that the Government are putting in place, by providing a loophole by which an inter-bank payment system may escape recognition.
Officials advise me that Amendment No. 46 is a moderate improvement on amendment No. 47. Amendment No. 46 offers the alternative words: eligible for designation. It is still, however, fundamentally flawed for several reasons, of which I shall give the Committee one or two. Paragraph 1 of the schedule to the SFRs requires the law of England and Wales, or Scotland to be the governing law of the system, whereas clause 168(5) of the Bill provides that an inter-bank payment system, to which this part applies, may include systems that operate wholly or partly in relation to persons or places outside the UK, and may, therefore, be governed by foreign law. Therefore, payment systems not eligible for designation under the SFRsbecause they are governed by foreign law, for examplewould be precluded from recognition regardless of their systemic or system-wide importance in the UK.
There is also scope for a system to avoid even being eligible for designation. For example, SFRs require systems to define a point after which a transfer cannot be revoked or cancelled by the sender. If a system makes that part of the rules unclear, that system would no longer be eligible for designation. Both amendments would unnecessarily restrict the scope of the clause and limit the inter-bank payment systems that could be recognised by the Treasury. We do not think that they are a good idea.
Amendments Nos. 46 and 47 constrain flexibility and we do not think that they are required. I emphasise that when we consulted on the criteria in July with the document, Financial stability and depositor protection: further consultation, we specifically asked whether the criteria set out were right, and whether they would provide sufficient flexibility as payment systems evolved over time. The majority of responses agreed that the criteria were appropriate and that they offered the right degree of flexibility to allow for the evolution of payment systems. Respondents considered the latter point particularly important in terms of future-proofing the legislation. That is why, should the hon. Member for South-West Hertfordshire choose to press amendments Nos. 46 and 47 to a vote, I invite hon. Members to oppose it.

David Gauke: I am grateful to the Minister for addressing the points raised by amendments Nos. 46 and 47. I appreciate his arguments. He did not specifically address the issue of whether a more elegant solution could ultimately be reached in relation to both the designated system and the recognised system, but I see that trying to impose one system on the other would create difficulties. I have one point that is more broadly related to the clause. We have started to touch on the issue of systemic risk, and I should be grateful if we could address that issue in the stand part debate. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

David Gauke: My point, which has been touched upon by my hon. Friend the Member for Wellingborough, is on the issue of systemic risk and risk of serious consequences for business or other interests throughout the UK. Earlier, the Minister set out the payment systems that will be recognised under the provisions. He also agreed that we should first look at what systems will involve a systemic risk. It is worth quoting again from the Bank of England document, Oversight of Payment Systems from November 2000:
Systemic risk is likely to be significant only in relation to payment systems transferring amounts which are large in relation to the balance sheets and capital resources of at least some of the members; in practice, this usually means systems used to settle wholesale financial market transactions in money, foreign exchange and securities.
Does the Minister agree that in clause 171(1)(a), those payment systems where disruption of the operation may
threaten the stability of, or confidence in, the UK financial system,
relates to payments that are involved in the wholesale markets? Will the other payment systems to which he referred, such as credit and debit card payment systems, fall under paragraph (b), which is
to have serious consequences for business or other interests throughout the United Kingdom?
The point I am trying to draw out is that it is not necessary for a payment system to have systemic risk for it to be recognised under the provisions. I should be grateful if the Minister would confirm that.
I said earlier that the Bank of England has traditionally taken a differential approach to the principles that apply, depending on the nature of what they do and largely on the factors set out under clause 171(2), to which my hon. Friend the Member for Wellingborough referred. We shall probably debate that when we come to clause 171, but the Minister might want to deal with it now.

Ian Pearson: We are discussing clause 171.

David Gauke: I am sorry; I meant when we come to clause 174 on principles and clause 175 on codes of practice.
Even though recognition may apply under paragraphs (a) or (b), the application of the rules and principles is likely to be tougher for those entities where there is a systemic risk under paragraph (a) than those under paragraph (b).

Peter Bone: Subsection (1) contains the phrase,
only if satisfied that any deficiencies in the design of the system, or any disruption of its operation.
Let us consider the airline industry. It might have a design code of practice. The design might be right. There would be no disruption to the operation, but the administration of the airline might be failing to meet the design, with the consequence that something disastrous happens at the end. That is like the banking system: the design might be right, but its administration might be wrong. Why is that specifically excluded from clause 171(1)(a)?
The test falls on two issues, but not a third. The interpayment system might be designed right. It may be operated correctly at the time, but as time goes on there might be a failure in the operation, of which the Treasury would be aware. The Minister may be able to clarify why it is not the case, but there seems to be an omission.

Ian Pearson: Clause 171 states that the Treasury may make a recognition order only if satisfied
that any deficiencies in the design of the system, or any disruption of its operation, would be likely
to have consequences of a systemic nature under subsection (1)(a), as the hon. Member for South-West Hertfordshire said, or to have
serious consequences for business or other interests throughout the United Kingdom
under subsection (1)(b).
It is not as simple as to say that paragraph (a) means wholesale, while paragraph (b) means retail. Systemic could be retail or wholesale. For example, the BACS system has links to retail and is potentially systemic. When it comes to defining which systems are covered by paragraphs (a) and (b), there is no real disagreement within the financial services community.

David Gauke: I am grateful for the Ministers clarification. He will be aware that I was quoting what the Bank of England said in the year 2000. If the position has evolved since then, so be it. When making a recognition order, does the Treasury intend to make it clear whether paragraphs (a) or (b) apply or whether they will both apply?

Ian Pearson: We would certainly want to operate in an open and transparent manner and, as I have explained, we shall seek advice from the Bank of England and the Financial Services Authority before making such recognitions. I do not think that there will be a lot of contention in that area.
I believe that subsection (2) is important, despite the suggestion of the hon. Member for Wellingborough that we focus just on subsection (1). When deciding whether something is systemic or will have serious consequences, it is right to consider the number and value of the transactions processed by the system, the nature of the transactions, whether they could be handled by other systems and the relationship between the system and other systems.
I will explain why those criteria are appropriate. Whether transactions could be handled by other systems is relevant to the consideration of systemic or system-wide importance because the extent and effect of the disruption caused by system failure are likely to be greater if there are no alternatives. For example, CHAPS carries high-value same-day payments for the settlement of sterling obligations in financial markets. No other system provides that facility.
It is important to consider relationships with other systems because such interdependencies could generate system-wide or systemic risks that are not apparent when the system is viewed by itself. Interdependencies might exist operationally or because of the use of a shared liquidity pool, such as the ability to transfer liquidity between CREST and CHAPS. There could also be an overlap in memberships of the two systems. The criteria in the clause will inform the assessment by the Treasury of the systemic or system-wide importance of the inter-banking system and thereby identify whether formal oversight by the Bank of England is appropriate to minimise the risk to the financial stability of the UK.
The hon. Member for Wellingborough also remarked that the issue is not just with the system, but with the administration of the system. I refer him to later clauses, which I believe deal adequately with the points he has made.

Question put and agreed to.

Clause 171 ordered to stand part of the Bill.

Clause 172

Procedure

Question proposed, That the clause stand part of the Bill.

David Gauke: I have one or two questions about the procedure for making a recognition order. The clause gives us another opportunity to raise questions about the relationships between the Treasury, the Bank of England and the FSA. Subsection (3) states:
In considering whether to make a recognition order in respect of a payment system the Treasury may rely on information provided by the Bank of England or the FSA.
Does the Minister envisage circumstances in which the Bank of England or the FSA will initiate the process? Will there be times when the Bank of England goes to the Treasury and says, We think that this payment system needs to be recognised.? Is that how the process will work in practice? There is an obligation on the Treasury to consult the Bank of England, but can he imagine circumstances in which the Bank of England may take a different view and say that a payment system should not be recognised? Are there any circumstances when the Treasury will overrule the Bank of England?
Although it is unlikely, will it be possible for the operator of a payment system to make an application to be recognised, in the same way that they can make an application to be designated? Under subsection (1), the Treasury will consider any representations made, presumably by the Bank of England or the operator of the system. An operator of a system may not want it to be recognised. What will be the time frame in which the operators of systems that could be recognised can make representations? How long will the Treasury take to consider such representations?
Subsection (2) raises the issue of recognised investment exchanges and clearing houses and the FSAs role. Where a recognised clearing house or investment exchange will be a recognised payment system, which entity will take the lead in regulationthe FSA or the Bank of England? The Minister will be aware of the concerns about entities slipping between the gaps, which I suspect is one of the driving forces behind the Bill. Can he answer that question?

Peter Bone: I think that clause 172(1) is the going out to lunch part of the Bill. In the past, the Bank of England, the Treasury and the operator would get together and talk things over, and this subsection tries to re-create that consultation. If at the end of the consultation the Bank of England and the operator took the same view but the Treasury took a different one, it is not clear whether the Treasurys view would necessarily go ahead, even if the other two parties were against it.

Ian Pearson: The clause sets out the process by which recognition orders are to be made. Again, I have to tell the hon. Gentleman that this is not the going out to lunch clause. It is a clause that makes clear how the procedure should operate.
I shall try to add flesh to the bones of the clause, in response to the largely theoretical questions posed by the hon. Member for South-West Hertfordshire. In practice, there will be a large, if not complete, measure of agreement between the authorities in the tripartite system and in the banking and building societies system, as to which inter-bank systems should be recognised. Important systems may, however, emerge in the future and the hon. Gentleman is right to want to probe the basis on which future systems might wish to be recognised. We have already indicated the sorts of system that will be recognised initially, and once the legislation has been passed we expect that a range of systems will be completely agreed between all parties. In the future, the Bank of England and/or the FSA could bring information to the Treasury along with a recommendation to recognise a system. In addition, an operator could apply to be recognised. The Treasury can consider any representations, and the decision to recognise is at its discretion. However, we would want to consult the FSA and, importantly, the Bank of England. There needs to be a clear designating authority, and the legislation makes it clear that that is the Treasury.

Stewart Hosie: The Minister has just said that recognition would be at the Treasurys discretion, but he has also said that a new inter-bank system could emerge that might, if it failed, be a systemic failure. Surely, the decision to recognise ought not to be at anyones discretion. If an inter-bank payment system has become so big that it is critical and that if it failed it would be a systemic failure, recognition should be automatic and not at the discretion of the Treasury.

Ian Pearson: Perhaps I was being loose with my terminology, but let me make it clear that the Treasury, which is able to exercise that power, will do so at its discretion. It will want to use the power if it believes that clause 171(1)(a) or (b) are engaged. As I said, in the normal course of events I expect there will be a large measure of agreement on the types of inter-bank payment system we are discussing. With regard to the potential for the future, the Treasury will be open to representations from the Bank of England, the FSA and individual organisations on whether there are new systems that are of such systemic or system-wide importance that they should be recognised.
The hon. Member for South-West Hertfordshire raised an issue about the time frame. As he will appreciate, that will depend on the nature of the representations. The Treasury might seek further information from the Bank of England, the FSA or the operator of a system, so it is not possible to give a precise time scale. I return to the overall point that there has to be a recognition procedure, and we believe that it is right that the Treasury leads on that. The Treasury will consult widely on that point with the Bank of England, the FSA and operators. I hope that those reassurances will be supported by the Committee.

Question put and agreed to.

Clause 172 ordered to stand part of the Bill.

Clause 173

De-recognition

Ian Pearson: I beg to move amendment No. 19, in clause 173, page 89, line 11, after recognised, insert inter-bank.
The amendment is a technical correction intended to provide consistency across part 5 of the Bill. Clause 170 provides for the Treasury to make a recognition order in respect of an inter-bank payment system, thereby bringing it within the Bank of Englands remit as formal overseer. Clause 173 provides for the revocation of a recognition order made under clause 170. The amendment makes it clear that the Treasury must consider requests by the operator of a recognised inter-bank payment system only in relation to the recognition order made under clause 170(1) and not one made, for example, under the Financial Services and Markets Act 2000.
By way of example, clearing houses or investment exchanges may be recognised by the FSA under part 18 of the 2000 Act. Such recognised clearing houses and investment exchanges are then subject to the FSAs regulatory regime, and those recognised clearing houses or investment exchanges might contain embedded payment systems that do not meet the recognition criteria in clause 171 and would not, therefore, be recognised by the Treasury under clause 170(1). In such circumstances, it would be inappropriate for the Treasury to consider requests for revoking a recognition made by the FSA. That is why we believe this technical amendment to be necessary.

Amendment agreed to.

Question proposed, That the clause, as amended, stand part of the Bill.

David Gauke: I have a brief question for the Minister on the subsection that he has amended, and we are grateful for his explanation for that amendment. My question relates to the circumstances in which the Treasury must consider any request by the operator of a recognised payment system for revocation of its recognition order. We have not tabled an amendment to the clause, but perhaps the Minister might help the Committee on this point. When the Treasury rejects any such request, does he consider it appropriate that it should give reasons for that rejection? Furthermore, is there anything more that he can say on whether an application for revocation would be successful, other than referring to the recognition criteria in clause 171? If a payment system saw its market share fall substantially, whether because of this regulatory regime or commercial factors, would that be the sort of matter that the Treasury would take into account, on which grounds it would be willing to grant revocation?
Would it ever be possible for a payment system to put in an application with a view to its coming into effect some months down the line? A payment system might be seeking to wind up its business. Rather than simply doing so and still finding itself a recognised system for these purposes and with various obligations on it, I wonder whether it could work with the Treasury and say, We are going to cease performing at some time. We would like the revocation of the recognition order to coincide with the time we cease trading so there is not a huge overlap. Would the Treasury be willing to work in a constructive manner with payment systems were those circumstances to arise? I do not know how likely that would be, but certainly in other sectors when a business winds up it wants to be able to work with the regulator to do that in as smooth and orderly a fashion as possible.

Ian Pearson: I can assure the Committee that the Treasury always wants to act in a supportive and helpful manner in these areas. The hon. Gentleman raises some practical points about what might happen if an inter-bank payment system was in decline and no longer had any systemic importance. The Bank of England will monitor the situation closely. It will undoubtedly be in contact with the operator. The tripartite authorities work very closely together. In those circumstances, there would be no alarms and no surprises. On the question whether reasons would be given if the Treasury refused a request of an operator to de-recognise a payment system, in the spirit of openness and transparency, the Treasury would naturally want to give its reasons. I am happy to place that comment on the record for those who look at these things.

Question put and agreed to.

Clause 173, as amended, ordered to stand part of the Bill.

Clause 174

Principles

Question proposed, That the clause stand part of the Bill.

David Gauke: We have already touched upon these principles and the contents of the clause in earlier discussions. I note that the clause states that the Bank may publish principles. We have not tabled an amendment to say that it must do so, but I should be grateful if the Minister would confirm that it is intended that principles will be published and that they will apply to the operators of recognised inter-bank payment systems.
A set of principles is already in place for such payment systems. These have been established by the Bank for International Settlements, specifically the Committee on Payment and Settlement Systems. They are described as the core principles for systemically important payment systems. They have historically been adopted by the Bank of England and other central banks. Mr. Hood, you will be relieved to learn that I have no intention of reading out the principles in full. In broad terms they relate to: legal basis; the participants having a clear understanding of the systems impact; the management of financial risk; prompt final settlement; settlement in multilateral netting systems; settlement assets; security and operational reliability; efficiency; access criteria and governance. Can the Minister say whether the principles under the clause will essentially be those, and confirm that there is no intention of changing them? The clause states:
Before publishing principles the Bank must obtain the approval of the Treasury,
but will consultation on the principles take place more widely with operators? Will they have an opportunity to put their views?
The explanatory notes state that the clause will reflect the core principles. We need to know whether those principles will be those to which I have referred, and that there will be no real changethe point raised by my hon. Friend the Member for Wellingborough when he drew attention to the regulatory impact assessment. I notice that a breach of principles will not constitute a compliance failure for the purposes of clause 182. Without getting into a debate on that clause, can the Minister explain the status of the principles and say why they will not constitute a compliance failure? It is the case for firms generally regulated by the Financial Services Authority under the Financial Services and Markets Act 2000 that there is a set of principles and a set of rules, but that breach of the principles can constitute a regulatory offence. Indeed, most disciplinary action taken by the FSA refers to a large extent to principles. Perhaps the hon. Gentleman can also explain that.
I return to the point that the Bank of England, in its oversight of payment systems until now, does not necessarily require each payment system to comply with every core principle. Given what the Minister said about which systems will constitute recognised systems, I should be grateful for clarification. He might believe that he has provided it, but it would help the Committee if the point were made absolutely clear and it would help us to know whether, for those institutions, although not systemically important, full observance of the core principles is necessary.

Peter Bone: I draw attention to subsection (1) and the wonderful word may in the phrase:
The Bank of England may publish principles.
Those principles have been working in practice for a great number of years, but I understand that there is no necessity to publish them because they are being used anyway and the regulatory impact assessment says that there will not be any change. Is it the Governments intention that the clause is only in the Bill in case they think that the principles need to be published, or do they definitely intend to publish them? If so, why does the Bill not state that the Bank of England must publish? I am not clear whether that is something that the Government are holding in reserve or whether they will take such action. If that is their intention, perhaps the Bill should be amended at a later stage.

John Pugh: My view is similar to that of the hon. Member for South-West Hertfordshire, but possibly more basic and a little more naive. I could have said the same about the principle, the rules or the codes of conduct. I have not seen examples of each, but when we have discussed them hitherto in Committee, we have talked primarily about the robustness, the security and the resilience of payment arrangementsthe technical issues. There are wider issues of banking practices and ethics. At its simplest level, we consumers have all noticed how debits are recognised almost immediately and credits after appreciable delay, which causes concern and seems unreasonable in the high-speed world of IT. There is a distinction between what is regarded as a legitimate matter of commercial choice for payment systems, and what is a matter for public regulation. In commenting on this, the British Banking Association said that it was worried about the effect of regulation on competition. I seek further clarification from the Minister, if only to help me, on the scope of the principles, codes and system rules.

Ian Pearson: I am sure that the whole Committee is relieved that we are not going to have an extensive debate on may, shall or must in the legislation. I confirm that the intention is for the Bank of England to publish principles to which operators of recognised inter-bank payment systems must have regard in operating those systems. As set out, the principles must be approved by the Treasury before publication.
The clause, in essence, formalises an aspect of the existing structure of oversight under which the Bank of England expects payment systems to take account of the Committee on Payment and Settlement Systems and its core principles for systemically important payment systems, which were referred to by the hon. Member for South-West Hertfordshire. Core Principles for Systemically Important Payment Systems was published in January 2001. The principles emphasise the importance of those systemically important payment systems within which disruption could trigger or transmit further disruptions among participants, or cause systemic disruptions in the financial markets more widely.
Without wishing to pre-empt the contents of the Bank of Englands principles with regard to the clause, I can inform the Committee that the types of principles covered in the CPSSs Core Principles for Systemically Important Payment Systems include a well-founded legal basis, understanding and management of financial risks and various elements covering matters such as operational resilience, efficiency and effective governance. The core principles are internationally accepted as important for sound, stable and well functioning financial systems. The Bank will work closely with industry in developing the principles, but we do not see the Bank intending to change substantially the positions that it has taken in the past in such matters. The Bank will also, of course, want to take into account other relevant, internationally agreed recommendations and best practice when setting its principles.
The hon. Member for South-West Hertfordshire raised the issue of why failure to comply with the principles was not deemed a compliance failure. Later on in his speech he answered his own question, when talking about not everyone having to comply with each principle. All recognised inter-bank payment systems must have regard to the principles, but it is intended that the Bank of Englandas nowwill adopt a proportionate approach as to the level of that regard, based on the risk posed to the system and its relative systemic or system-wide importance. It is right, for example, that the Cheque and Credit Clearing Company should not have the same requirements made of it as CHAPS when there is no other alternative. Therefore, it would not be appropriate if failure to comply with principles triggered a compliance failure. Instead, the Bank may use additional information-gathering powers in the form of requiring an independent report under clause 181, for instance. Or, if a recognised inter-bank payment system is not operating with sufficient regard to its principles, based on the Banks analysis, the Bank may then choose to use its powers to issue directions or to require rule changes. Such matters will come up.
I hope that that answers the question of the hon. Member for South-West Hertfordshire, although I think that he answered it himself.

Question put and agreed to.

Clause 174 ordered to stand part of the Bill.

Clause 175

Codes of practice

Question proposed, That the clause stand part of the Bill.

David Gauke: The clause relates to codes of practice. I know that the Minister is not keen to have a lengthy debate about may and must, but I shall raise the issue briefly. Does the Bank of England intend to publish codes of practice? My second point is about consultation. The clause does not mention consultation with operators, or state whether the Treasury or the Bank of England intend to hold consultation about codes of practice and any changes to them.
Are the codes of practice intended to elaborate on the principles, or will they address new areas? To the layman, the principles look comprehensive but perhaps the Minister will clarify that point. Finally, the Bank for International Settlements produces material that could be described as a code of practice that elaborates on the principles. I looked at it last nightthere are about 100 pages of material along those lines. The Minister said that the principles are likely to be similar to existing core principles; will the codes of practice mentioned in clause 175 be similar to that of the Bank for International Settlements?

Peter Bone: I do want to be pedantic about the issue of may or must. I assume that the Minister will confirm that the Bank of England will publish codes of practice. If the Minister will say that, so should the Bill. The Bill governs the law of the countryit is not about what the Minister says, it is what is on the statute book. If the Government have determined that this will happen, it should be in the Bill and a Government amendment should correct that later in the proceedings. This is an important issuewe must not have sloppy drafting in Bills.

Brooks Newmark: My point follows the questions by my two hon. Friends. The question is not only, What will the codes of practice be? That is important and, as my hon. Friend the Member for Wellingborough said, the devil is always in the detail, but equally importantly, how will day-to-day compliance be monitored? I am curious to know how the Minister envisages that taking place.

Ian Pearson: It might help the Committee if I briefly explain how the principles, the codes of practice, system rules and directions fit together. We see them as a complementary suite of available powers. Clause 175 differs from clause 174which is on principlesin that the codes of practice are intended to set out binding requirements in relation to specific areas, such as messaging standards, or levels of resilience, whereas the principles are intended to provide high-level, overarching guidance. The principles will set out the general conduct expected of recognised payment systems and they will be interpreted by the Bank in a manner proportionate to the risks posed by individual systems; whereas the codes of practice will focus on a more specific level of detail. For example, a code of practice may require certain types of system to observe specific minimum standards in relation to business continuity. I can confirm that it is the Bank of Englands intention to issue a code of practice, and it will consult with interested parties before doing so.

Stewart Hosie: The Minister said that he expects the code of practice to be binding. Will there be a sanction should parts of the code fail to be met? If the code is expected to be bindingeffectively legislationwhy is there not at least a statement of general intent to that effect in the Bill?

Ian Pearson: The principles and code of practice are two powers found in clauses 174 and 175. They are complemented by the system rules in clause 176, which we will come on to, and the directions in clause 177.
If I can, I shall say something briefly without straying on to those stand part debatesif they are thought to be necessary, Mr. Hoodbecause it explains the overall architecture. In clause 176 the Bank of England may want to ensure that the operator of a recognised inter-bank payment system makes rules relating to specific aspects of the payment system in question. For example, the Bank may wish to ensure that the system has rules in place to manage the default of a participant effectively. In clause 177, the Bank of England may wish to use its formal power to impose certain directions or instructions pertaining to how a specific recognised inter-bank payment system may operate. This may include requiring or prohibiting certain actions in relation to the system or setting standards to be met in the operation of the system. For example, the Bank might direct a system to set up a programme of tests of its crisis management arrangements, which were referred to earlier. This suite of powers will enable the Bank of England to carry out its function of oversight of payments effectively and efficiently. I think that starts to address the point raised by the hon. Member for Dundee, East but I suspect we shall come on to it at a later date.

David Gauke: I think the question raised by the hon. Member for Dundee, East is, why is it not in the Bill that clause 175 is binding and subject to sanctions? Clause 182 defines a breach of clause 175 as a compliance failure. The following clauses make it clear that sanctions are there. Far be it from me to always want to be helpful but, in this period of bipartisan co-operation, I think the Bill does make it clear that sanctions are available.

Ian Pearson: I was explaining, without going into detail, that there were clauses under which we would have the opportunity to debate those issues later. I think I have covered the points raised by hon. Members.

Question put and agreed to.

Clause 175 ordered to stand part of the Bill.

Clause 176

Systems Rules

Question proposed, That the clause stand part of the Bill.

David Gauke: The Minister has already outlined what clause 176 is about, which is the ability of the Bank of England to require an operator of a recognised inter-bank payment system to establish rules or to change the rules. I am simplifying a little. I again ask about time frame and consultation and the opportunity that an operator of a payment system will have to make representations to the Bank of England. I imagine there will be circumstances where the Bank of England will want to move very quickly with regard to system rules, although there may be times when these matters can be done in a co-operative way. I should be grateful for guidance from the Minister as to whether he envisages clause 176 being used in exceptional circumstances, where the Bank of England felt it necessary to impose rules on a payment systemif you like, forcing it on the operator, as opposed to reaching some agreement by dialogue. I know there have been instances under the non-statutory regime where the Bank of England has been able to reach an agreement by raising an eyebrowin the manner of Sir Desmond Glazebrook of Yes Minister fame, as referred to earlier by my hon. Friend the Member for Wellingboroughand that that will be the way in which the Bank of England will seek to work, through dialogue and co-operation, rather than necessarily using the rules in clause 176 as a routine way of forcing payment systems to change their rules.

Stewart Hosie: Subsection (1)(d) states that an operator may be required
not to change the rules without the approval of the Bank.
I do not know the internal workings of any inter-bank payment systems, but I have written financial computer systems. I would be astonished if an entire system and the rules under which it operated did not include the creation of financial and transaction reports, which may subsequently be used in company accounts or bank accounts to calculate things such as tax liability.
Should the tax regime change, will the provisions mean that rules cannot be altered to change the reporting from the systems without the approval of the Bank? I suspect that that is not the intention, but it might be an unintended consequence. Perhaps the Minister will think about whether minor changes in the rules of systems should require approval by the Bank if they are made simply to facilitate additional or changed reporting that falls outside the inter-bank payment system.

Ian Pearson: May I remark on the importance of system rules before addressing those points? System rules are a fundamental part of how payment systems operate. Among other things, they cover a payment systems legal structure, how risks are shared or managed and how default arrangements work. For example, the Bank of England may wish to ensure that a system has rules in place to manage the default of a participant effectively. The Banks powers on rules in the clause will be an important element of its oversight role for payment systems.
Rules fundamentally underpin the operation of any payment system. They are a crucial determinant of its efficiency and stability. Ensuring that an operator of a recognised inter-bank payment system has the appropriate rules in place on specific aspects of the payment system will ensure that it is not operated in a way that threatens the stability of financial markets or other business interests across the UK. It is important that our inter-banking system has effective rules in place and that the Bank of England has powers regarding those rules.
In response to the questions, we usually expect the Bank to operate in a co-operative way and discuss the system rules for an operator. It might be that in exceptional circumstances the Bank has to act quickly. The legislation therefore ensures that there is flexibility to take account of that. The hon. Member for Dundee, East asked whether the Banks approval will be required in all cases of rule change. Again, the word may is involved. Let me make myself clear: the Bank of England may require the operator of a payment system to seek approval before changing its rules, but that will not necessarily happen in all circumstances. System rules are important and it is right that the Bank has a strong oversight responsibility in that area. That is why we are giving these powers a statutory basis.

Stewart Hosie: Will it be permissible for a bank that is required to change the reporting in its system because of a tax change to do so without reference to the Bank of England?

Ian Pearson: I am sure that that will be the case.

David Gauke: The wording of the clause is
not to change the rules without the approval of the Bank.
Will it be possible in any circumstances for such approval to be retrospective? In other words, there may be times when a payment system needs to change the rules quickly for tax or operational reasons. In such circumstances, the operator might have to go to the Bank and say, We have done this; is it okay? Is that permissible under the clause?

Ian Pearson: I certainly see a distinction between routine changes to rules to comply with legislative requirements and future tax changes, and more wide-ranging changes to the rules that result from the decisions taken by an operator. Were an operator to consider making some fairly fundamental changes to its rules, I expect that it would want to have a conversation with the Bank as regulator in the first instance, and I think that that would happen in the normal course of events.

Question put and agreed to.

Clause 176 ordered to stand part of the Bill.

Clause 177

Directions

Question proposed, That the clause stand part of the Bill.

David Gauke: This clause allows the Bank of England to give directions to an operator of a recognised inter-bank payment system. With regard to the consultation representations from the affected operator, those issues that apply to system rules also apply to directions. Does the Minister see a direction under the clause as being an exceptional route of action taken by the Bank of England or as routine? May I ask specifically what those directions might relate to? The clause states:
A direction may...require or prohibit the taking of specified action in the operation of the system.
Would the Minister elaborate on what specified action might mean so that we are sure that it does not mean rule change, for example? It could be helpful to throw out even one possibility of what a specified action might be. It might be a question, for example, of whether employing an individual would, or would not, be appropriate, or whether that enables the Bank of England to assess if particular individuals are fit and proper to perform a role within a payment system in the way that the FSA, as a matter of course, assesses people performing approved functions under the Financial Services and Markets Act 2000. Is that part of what clause 177 is designed to address?

Ian Pearson: The clause gives the Bank of England power to give directions to the operator of an organised inter-bank payment system. Directions may require, or conversely prohibit, certain actions in the course of the operation of a recognised inter-bank payment system. Directions may also set standards to be met in the operation of the system.
As I understand it, the purpose of the legislation is not that directions should be used routinely. To give a specific example, the Bank might direct the recognised inter-bank payment system to set up a programme of tests on its crisis management arrangements. One would hope that the operator of the inter-bank payment system would wish to do that in any event and that agreement would normally be reached. If the Bank thought that the operator was unwilling to do so and that it was necessary, it is right that it should have the power by direction to require a programme of tests. That is an important part of the Banks oversight role for payment systems, as it enables it to ensure that specific steps, such as the one I have just indicated, are taken in relation to a payment system as and when the need arises.
Directions, unlike system rules, will make specific instructions regarding the general conduct of the payment system, rather than its rules of operation. Directions could also be made as emergency measures to take immediate action, or conversely, to stop doing something with immediate effect. Those powers are therefore necessary because they are an important part of the suite of regulatory tools, which I mentioned earlier, that enable the Bank of England to ensure that the payment system is both designed and operated in a manner that does not threaten the stability of the UKs financial system.
The hon. Member for South-West Hertfordshire asked what would happen in an instance when the Bank might not have confidence in an individuals ability to operate the system. We will cover that when we come to clause 186, if he thinks it is acceptable to debate the issue then.

Question put and agreed to.

Clause 177 ordered to stand part of the Bill.

Clause 178

Role of FSA

David Gauke: Briefly, the clause states that in exercising powers under this part of the Bill, the Bank of England shall have regard to
any action that the FSA has taken or could take.
This comes back to a theme that has run through the morning of the relationship between the various regulatory bodies. I can see that the purpose of the clause is to avoid any duplication. Are there any similar obligations on the FSA to have regard to any action taken by the Bank in respect of payment systems? I am also slightly curious about the phrase,
any action that the FSA has taken or could take,
as it is somewhat broad. I can see what the clause is trying to get at, but one could argue that it is vague.
Can the Minister reassure us that there will be good communication between the FSA and the Bank in this area? Could he identify structurally how that will be done? This is particularly an issue for recognised clearing houses and investment exchanges where the FSA has a major role. Who is in charge with regard to those institutions? I think it is essentially the FSA, but will the Minister confirm that that is the case? For those payment systems that are not either a recognised clearing house or a recognised investment exchange, does he expect that the Bank be in charge and what role will the FSA have in those circumstances?

Peter Bone: The clause touches on the tripartite arrangements, which are not unique. There are other areas where there is more than one agency responsible for a set of affairs, but usually there is a clear memorandum of working between the organisations, setting out which organisation is paramount in an area where things overlap. I am still not clear whether one organisation will come out on top when there is duplication. The clause deals with the relationship between the Bank and the FSA. We have been unable to see these memorandums of working, so will the Minister tell us whether there will be duplication? If there is, will the Bank, the Treasury or the FSA come out on top?

Ian Pearson: As I explained earlier, the Bank of England clearly has the lead responsibility when it comes to the regulation of inter-bank payment systems. In the case of payment systems within recognised clearing houses and investment exchanges, which are regulated by the FSA, the Bank will again have responsibility for the regulation of the inter-bank payment systems. Certainly in all the consultations in this area, there was overwhelming recognition that there should be a single regulator when it comes to inter-bank payment systems. To avoid duplication between the responsibilities of the FSA in the regulation of recognised clearing houses and recognised investment exchanges and the role of the Bank in overseeing inter-bank payment systems, there will be a memorandum of understanding between the Bank and the FSA. It will ensure that there is effective co-ordination and minimum duplication of regulations.

Mark Hoban: I dealt with the Investment Exchanges and Clearing Houses Act 2006 when it went through Parliament. In that Act, the FSA clearly has the responsibility for approving rule changes put forward by the clearing houses and investment exchanges. Would it not be better for that legislation to be modified through this Bill, rather than relying on a memorandum of understanding?

Ian Pearson: The Bill is clearthe Bank of England is responsible for the oversight of inter-bank payment systems. If it becomes necessary to take enforcement action, the Bank of England and the FSA will want to agree on which one of them is best placed to do so. It is important to recognise that we are setting out in different parts of the Bill the clear responsibilities of the tripartite authorities. It is right that the Treasury leads on, and has responsibility for, recognition, and that the Bank of England has lead responsibility on inter-bank payment systems.

Mark Hoban: I am grateful to the Minister for being explicit about inter-bank payment systems. We support the Bank of England taking the lead. Why is there a statutory obligation on the Bank of England to have regard to the FSA, but, as far as we can see, no comparable obligation on the FSA to have regard to the Bank?

Ian Pearson: It is my understanding that the clause was designed to ensure that the role of the FSA was explicitly recognised, given its responsibilities on recognised clearing houses and investment exchanges. I am not sure that a reciprocal power is necessary, because there are other measures within architecture of the Bill to ensure that the tripartite authorities talk to one another. However, I will reflect on that point further and, if necessary, return to it at a later stage.

Question put and agreed to.

Clause 178 ordered to stand part of the Bill.

Clause 179

Inspection

Question proposed, That the clause stand part of the Bill.

David Gauke: We enter into the enforcement area of part 5. I have more comments to make on clause 180, some of which relate to this clause. Does the Minister consider the inspection powers in clause 179 to be exceptional? I assume that the Bank of England will be able to work co-operatively with operators of payment systems without recourse to the relevant clauses.
Subsection (2) says that an operator must
grant an inspector access, on request and at any reasonable time, to premises on or from which any part of the system is operated.
What will the notice period for an inspector to access premises be? Her Majestys Revenue and Customs, for example, has various rules and guidance about how much notice it should give an entity before it gains access to premises. What does the Minister see the position as being in those circumstances? It is particularly significant, given the issues regarding clause 180, but I hope to address those this afternoon.

Stewart Hosie: The clause is fairly similar to a clause that we discussed earlier with regard to the provision for HMRC officers to have access to ascertain documents. We had a debate in another Committee Room about what a document meant.

It being One oclock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four oclock.